Processing the Computer Market

By George Leong, B.Comm. Published : May 30, 2007

The world’s largest computer maker, Dell Incorporated (NASDAQ/DELL) is not the stock it used to be when founder Michael Dell first started the company from his garage in the ’80s. Both revenue and earnings growth has slowed considerably due to intense competition and the fact that computers are now commodity stocks.

Over the last four quarters, Dell has beaten Wall Street estimates on only two occasions including a weak 3.4% upside in the fourth quarter of fiscal 2007. Revenue growth in fiscal 2009 ending in January is predicted at a mere 6%, not exactly the sign of a growth stock. The reality is the easy profits have been made on Dell and it is time to move on if you have not already done so.

In the fight for world market share, we have seen increased competitive pressure from other key players, including Hewlett- Packard Company (NYSE/HPQ) and China-based Lenovo; both of which are currently threatening Dell’s stranglehold on the world market share.

The reality is the news should not have been a surprise. We have discussed this issue in the past regarding Dell and the threat of competition, especially from Lenovo, which has the use of cheap labor and resources in China. Lenovo, which purchased the business laptop “ThinkPad” from International Business Machines Corporation (NYSE/IBM), is expanding its product line, including its cheap desktops into the United States. This is something that Dell and other PC makers should be concerned about, as it is fast approaching.

The reality is Dell has been drastically cutting prices on its products by much larger discounts than in the past. Obviously, Dell realizes the extent of the situation and aims to maintain its market leadership. But the fact is the PC maker is a commodity market where margins, which used to be higher, are now squeezed. This is the trend, and I do not expect it to change as competition heats up going forward.

Where in the past the PC market may have been considered a growth area, you can no longer say that. The market is mature. Price competition for market share will only rise. Investors looking for growth should bypass PC makers and look for companies who are innovators in technology, whose products are in an early stage.